A self-directed IRA isn't a different type of IRA. Rather, the term refers to any individual retirement account (traditional or Roth) that gives you more investment control by allowing you to direct your IRA assets into nontraditional investments.

For example, in addition to the usual IRA mainstays (stocks, bonds, mutual funds, and CDs), a self-directed IRA might invest in real estate, options, limited partnership interests, or anything else the law (and your IRA trustee/custodian) allows. In fact, the only investment you can't have in an IRA is life insurance. (Collectibles--for example, artwork, stamps, wine, and antiques--aren't prohibited, but if your IRA purchases these items, you could suffer adverse tax consequences.)

Get A Specialist
To get started, you'll need to find a trustee or custodian that specializes in self-directed IRAs. Make sure you understand the expenses involved--some trustees charge transaction fees and/or asset-based fees, depending on the particular investment.
You also need to be aware of the prohibited transaction rules. These rules are designed to make sure that only your IRA, and not you (or your immediate family), benefits from your IRA transactions. For example, you are prohibited from buying investments from, or selling investments to, your IRA. If you violate these rules, your account will cease to be treated as an IRA, with potentially devastating tax consequences.

Understand the Additional Costs
Finally, you need to understand the UBIT (unrelated business income tax) rules. Even though IRA investments usually grow tax deferred (or even potentially tax free in the case of a Roth IRA), if your IRA conducts certain business activities, or has debt-financed income, then your IRA could be taxed currently on all or part of the income generated.

Although we don't generally recommend these alternative IRA accounts, a qualified financial professional can help you weigh the benefits and risks of a self-directed IRA...and help you determine if it's the right choice for you.